The S&P 500 closed down 4.4 percent while BofA--the biggest U.S. bank--plummeted 10.9 percent and Citi was off 10.5 percent.

Goldman lost 10.1 percent of its value while Morgan Stanley shed 9.7 percent. Even JP Morgan, considered one of the most solid large institutions, fell 5.6 percent despite CEO James Dimon's remarks on CNBC that his company is not worried about its exposure in Europe, where much of the market chaos began Wednesday.

The US stock market was dented by renewed fears of a global economic slowdown--which for banks can translate to curbed loan demand, reduced corporate appetite for growth through acquisition and reduced investor appetite for risk.

The decline for most bank stocks accelerated near Wednesday's close, putting investors on alert for Thursday's opening.

Trepidation about the European debt crisis spread to French banks on Wednesday, and had a spillover effect on US financial institutions.

Societe General, (SOGN.PA) which denied rumors it was on the brink of collapse, fell 21 percent and BNP Paribas (BNPP.PA) lost 13 percent.

"Bank stocks tend to reflect investors' outlook on the economy," said Jason Goldberg, bank analyst at Barclays Capital. "Citi and BofA are two of the more global U.S. banks."

Goldman and Morgan Stanley, the two major investment banks that converted to commercial bank corporate structures during the 2008 financial crisis, also proved sensitive to investor concerns that the global economy is in a prolonged slump.

"A downturn would mean in shift in business," said Brad Hintz, a bank industry analyst at Bernstein Research who once worked at Morgan Stanley. "Equity capital markets cease, new M&A falls and the average retail investor dives back into a foxhole. This is bad for Morgan Stanley and Goldman Sachs."

The Wednesday share drop follows a market rally for financial stocks on Tuesday after the Federal Reserve signaled at least two more years of near-zero interest rates. Bank of America shares rose 16 percent on Tuesday, after dropping 20 percent on Monday. Citi shares climbed 13 percent after a 16 percent drop the previous day.

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